2-1
Comparing Merchandising
and Manufacturing Activities
Chapter 2
Merchandisers . . .
z
z
Cost Terms, Concepts,
and Classifications
Buy finished
goods.
Sell finished goods.
Manufacturing Costs
Direct
________
Manufacturing
Overhead
The Product
z
Buy raw materials.
Produce and sell
finished goods.
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Direct Materials
Those materials that become an integral part
of the product and that can be conveniently
___________________to it.
Example: A radio installed in an automobile
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z
MegaLoMart
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Direct
_______
Manufacturers . . .
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Direct Labor
Manufacturing Overhead
Those labor costs that can be easily traced to
individual units of product.
Manufacturing costs that _________be traced
directly to specific units produced.
Examples: Indirect labor and indirect materials
Wages paid to employees
who are not directly
involved in production
work.
Example: Wages paid to automobile assembly workers
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Examples: maintenance
workers, janitors and
security guards.
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Materials used to support
the production process.
Examples: lubricants and
cleaning supplies used in
the automobile assembly
plant.
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2-2
Classifications of Costs
Manufacturing costs are often
classified as follows:
Direct
Material
Direct
Labor
Prime
Cost
Manufacturing
Overhead
Which of the following costs would be
considered manufacturing overhead at Boeing?
(More than one answer may be correct.)
A. Depreciation on factory forklift trucks.
B. Sales commissions.
C. The cost of a flight recorder in a Boeing 767.
D. The wages of a production shift supervisor.
Conversion
Cost
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Quick Check 9
Product Costs Versus Period
Costs
Product costs include
direct materials, direct
labor, and
manufacturing
overhead.
Inventory
Cost of Good Sold
Period costs are not
included in product
costs. They are
expensed on the
income statement.
Expense
Sale
Balance
Sheet
Income
Statement
Balance Sheet
Merchandiser
Current assets
z
z
z
z
Cash
Receivables
Prepaid expenses
Merchandise inventory
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Quick Check 9
Which of the following costs would be
considered a period rather than a product cost
in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
Income
Statement
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Manufacturer
Current Assets
™ Cash
™ Receivables
™ Prepaid Expenses
™ Inventories
Raw Materials
Work in Process
Finished Goods
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The Income Statement
Cost of goods sold for manufacturers differs only
slightly from cost of goods sold for merchandisers.
Merchandising Company
Cost of goods sold:
Beg. merchandise
inventory
$ 14,200
+ Purchases
234,150
Goods available
for sale
$ 248,350
- Ending
merchandise
inventory
(12,100)
= Cost of goods
sold
$ 236,250
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Manufacturing Company
Cost of goods sold:
Beg. finished
goods inv.
+ Cost of goods
manufactured
Goods available
for sale
- Ending
finished goods
inventory
= Cost of goods
sold
$ 14,200
234,150
$248,350
(12,100)
$236,250
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2-3
Manufacturing Cost Flows
Costs
Balance Sheet
Inventories
Material Purchases
Raw Materials
Direct Labor
Work in
Process
Manufacturing
Overhead
Selling and
Administrative
Income
Statement
Expenses
Cost of
Goods
Sold
Finished
Goods
Period Costs
Quick Check 9
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Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
– Ending raw materials
inventory
= Raw materials used
in production
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Manufacturing
Costs
Work
In Process
Direct materials
As items are removed from raw
materials inventory and placed into
the production process, they are
called direct materials.
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Manufacturing
Costs
Raw Materials
Work
In Process
Beginning raw
materials inventory
Beginning inventory
is the inventory
carried over from
the prior period.
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Product Costs - A Closer Look
Raw Materials
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Product Costs - A Closer Look
If your inventory balance at the beginning of the
month was $1,000, you bought $100 during the
month, and sold $300 during the month, what
would be the balance at the end of the month?
A. $1,000.
B. $ 800.
C. $1,200.
D. $ 200.
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Which of the following transactions would
immediately result in an expense? (There may
be more than one correct answer.)
A. Work in process is completed.
B. Finished goods are sold.
C. Raw materials are placed into production.
D. Administrative salaries are accrued and
paid.
Selling and
Administrative
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Quick Check 9
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Quick Check 9
Beginning raw materials inventory was $32,000.
During the month, $276,000 of raw material was
purchased. A count at the end of the month
revealed that $28,000 of raw material was still
present. What is the cost of direct material
used?
A.
$276,000
B.
$272,000
C.
$280,000
D.
$ 2,000
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2-4
Product Costs - A Closer Look
Manufacturing
Costs
Raw Materials
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
– Ending raw materials
inventory
= Raw materials used
in production
Work
In Process
Conversion
costs are costs
incurred to
convert the
direct material
into a finished
product.
Direct materials
+ Direct labor
+ Mfg. overhead
= Total manufacturing
costs
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Product Costs - A Closer Look
Manufacturing
Costs
Raw Materials
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
– Ending raw materials
inventory
= Raw materials used
in production
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Direct materials
+ Direct labor
+ Mfg. overhead
= Total manufacturing
costs
Work
In Process
Beginning work in
process inventory
+ Total manufacturing
costs
= Total work in
process for the
period
All manufacturing costs incurred
during the period are added to the
beginning balance of work in
process.
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Quick Check 9
Beginning work in process was $125,000.
Manufacturing costs incurred for the month
were $835,000. There were $200,000 of
partially finished goods remaining in work in
process inventory at the end of the month.
What was the cost of goods manufactured
during the month?
A.
$1,160,000
B.
$ 910,000
C.
$ 760,000
D.
Cannot be determined.
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Quick Check 9
Direct materials used in production totaled
$280,000. Direct labor was $375,000 and
factory overhead was $180,000. What were
total manufacturing costs incurred for the
month?
A.
$555,000
B.
$835,000
C.
$655,000
D.
Cannot be determined.
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Product Costs - A Closer Look
Raw Materials
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
Manufacturing
Costs
Direct materials
+ Direct labor
+ Mfg. overhead
= Total manufacturing
costs
Costs associated with the goods that
are completed during the period are
transferred to finished goods
inventory.
Work
In Process
Beginning work in
process inventory
+ Total manufacturing
costs
= Total work in
process for the
period
– Ending work in
process inventory
= Cost of goods
manufactured.
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Product Costs - A Closer Look
Work
In Process
+
=
–
=
Beginning work in
process inventory
Manufacturing costs
for the period
Total work in process
for the period
Ending work in
process inventory
Cost of goods
manufactured
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Finished Goods
Beginning finished
goods inventory
+ Cost of goods
manufactured
= Cost of goods
available for sale
- Ending finished
goods inventory
Cost of goods
sold
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2-5
Cost Classifications for
Predicting Cost Behavior
Quick Check 9
Beginning finished goods inventory was
$130,000. The cost of goods manufactured for
the month was $760,000. And the ending
finished goods inventory was $150,000. What
was the cost of goods sold for the month?
A. $ 20,000.
B. $740,000.
C. $780,000.
D. $760,000.
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How a cost will react to
changes in the level of
business activity.
Behavior of Cost (within the relevant range)
Cost
In Total
Per Unit
Variable
Total variable cost changes
as activity level changes.
Variable cost per unit remains
the same over wide ranges
of activity.
Fixed
Total fixed cost remains
the same even when the
activity level changes.
Fixed cost per unit goes
down as activity level goes up.
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Quick Check 9
Which of the following costs would be
variable with respect to the number of
people who buy a ticket for a show at a
movie theater? (There may be more than
one correct answer.)
A. The cost of renting the film.
B. Royalties on ticket sales.
C. Wages of theater employees.
D. The cost of cleaning up after the show.
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Total ____________
change when activity
changes.
z
Total ____________
remain unchanged
when activity changes.
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Cost Classifications for
Predicting Cost Behavior
z
Quick Check 9
Which of the following costs would be variable
with respect to the number of cones sold at a
Baskins & Robbins shop? (There may be more
than one correct answer.)
A. The cost of lighting the store.
B. The salary of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
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Direct Costs and Indirect
Costs
Direct costs
Costs that can be
easily and conveniently
traced to a unit of
product or other cost
objective.
Examples:________
Indirect costs
Costs cannot be easily
and conveniently traced
to a unit of product or
other cost object.
Example:
____________________
__________________
__________________
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2-6
Differential Costs and
Revenues
Costs and revenues that differ among
alternatives.
Example: You have a job paying $1,500 per month in
your hometown. You have a job offer in a neighboring
city that pays $2,000 per month. The commuting cost
to the city is $300 per month.
Differential revenue is:
Differential cost is:
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Quick Check 9
Suppose you are trying to decide whether to
drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you don’t want to waste money needlessly. Is
the cost of the pizza you ate last night relevant
in this decision? In other words, should the cost
of the pizza affect the decision of whether you
drive or take the train to Portland?
A. Yes, the cost of the pizza is relevant.
B. No, the cost of the pizza is not relevant.
Quick Check 9
Suppose you are trying to decide whether to
drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you don’t want to waste money needlessly. Is
the cost of the train ticket relevant in this
decision? In other words, should the cost of the
train ticket affect the decision of whether you
drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.
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Teaching Note
Every decision involves a choice
between at least two alternatives.
Only those costs and benefits that differ
between alternatives (i.e., Differential
costs and benefits) are relevant in a
decision. All other costs and benefits
can and should be ignored.
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Quick Check 9
Suppose you are trying to decide whether to
drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you don’t want to waste money needlessly. Is
the annual cost of licensing your car relevant in
this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
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Opportunity Costs
The potential benefit that is
given up when one alternative
is selected over another.
Example: If you were
not attending college,
you could be earning
$15,000 per year.
Your opportunity cost
of attending college for
one year is $15,000.
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2-7
Sunk Costs
Quick Check 9
Sunk costs cannot be changed by any decision.
They are not differential costs and should be
ignored when making decisions.
Example: You bought an automobile that cost
$10,000 two years ago. The $10,000 cost is
sunk because whether you drive it, park it, trade
it, or sell it, you cannot change the $10,000 cost.
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Suppose that your car could be sold now for
$5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
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